All signals say sell, page-16

NPV estimated by discounted cash flows is very sensitive to margins and, therefore, to basket price and cost of production. Of these two, my judgement is that cost of production should be fairly definite as it is comprised of mostly well-known components (labour, machinery, time, flow-sheet, etc and estimable contingencies involving things like weather, labour disputes, plant mishap and the like).

Revenues (basket pricing) is largely unknown, and unknowable, as the determining factors involve global economies and the macro-balance between supply and demand (war, economic collapse or disruption, major changes in the supply from new mines, major unanticipated changes in demand — up or down — from changes in technologies or social demands, etc). In this category, the developments by SYR fall. They are subject to considerable uncertainty such as delays in construction, cost over-runs, insufficient financial contingencies and the inability to raise further capital, and the like. These problems confront all major projects, not just SYR. But, the point is, basket prices may be higher or lower than the estimates made in NPV calculations that form part of a BFS. It is the job of the risk-management sections within the financial agencies to estimate the sensitivity of the calculations to the various uncertainties. (Not an exact science! ...but a task that must be undertaken.)

As far as the "discount rate" is concerned, as I understand it, that is just an estimate of the return one might be able to get on one's capital if one chose to invest it elsewhere. Its value is chosen so as to compare the project against alternative investment options. No-one in their right mind would invest US$80M in an uncertain graphite mine with an Internal Rate of Return of 15% if they could get 15% "risk-free" by investing in US government bonds, say.

But where, today, can one get low-risk 15% on ones invested capital? Nowhere, I would tender. (That is one reason housing prices in places like Sydney have undergone rapid appreciation over the last few years, I suggest. "Safe as houses!" But I digress...) The last time one could get 15% on US paper was in the 1980s, at the peak of the gold boom when Paul Volker jacked up interest rates to kill off inflation.

So... one might question the NPV and IRR tended by KNL (and its consultants) in its BFS to the 5-star German and South African banks, but I doubt if either you or I can arrive at a better understanding of risk than they with respect to this investment. Of course, Germany is driven by other considerations — security of supply of suitable graphites (note the plural) probably being uppermost — than a typical investor. But, nonetheless, they are not likely to fund a dud willy-nilly just for security concerns. That they have gone as far as they have in supporting KNL's bid for finance, adding the fillip of a GGG, should signal to the common investor that KNL is the "real deal". What impact SYR does or does not have on future basket prices is highly uncertain and, in any case, just one of the many highly uncertain elements to the graphite gambit.



FWIW IMO DYODD